To Asia via Vancouver; Cenovus tests crude oil exports to China

Cenovus Energy, one of Canada’s top-tier oil sands producers, has sent its first tanker load of crude to China, intensifying competition to expand port facilities on the British Columbia coast at the same time opposition is growing to Enbridge’s pivotal Northern Gateway project.

Brian Ferguson, chief executive officer at Cenovus, disclosed his company sold 250,000 barrels to an unspecified Chinese customer earlier in February to “establish a relationship with refineries in terms of how they value and price Cenovus crude. So it’s very significant strategically.”

The shipment was made possible when Cenovus gained 12,000 barrels per day of firm service on Kinder Morgan’s Trans Mountain pipeline from Edmonton to the Westridge Marine Terminal in the port of Vancouver.

“It’s allowing us to get tidewater pricing off Brent, so there’s significant uplift per barrel in terms of price realization,” Ferguson said, adding to support among producers for both Northern Gateway and expansion of Trans Mountain.

Doubling of Trans Mountain

Kinder Morgan stepped up its race against Enbridge to access Asia on Feb. 21 when it reported enough binding commitments from shippers for a proposed C$3.8 billion plan to double Trans Mountain’s capacity to 600,000 bpd.

Ian Anderson, president of Kinder Morgan’s Canadian unit, said his company can now complete initial project design and planning and seek approval from the National Energy Board.

A final investment decision will be made by the end of March, although an in-service date has not been set, although Anderson said last year the project could be completed before Northern Gateway’s hoped-for startup in 2017.

Without naming its prospective shippers, Kinder Morgan said it had attracted support from a “diverse group of existing and new shippers.”

Ferguson was unwilling to say outright whether Asian buyers can offer a hedging mechanism to offset volatility in the North American light-heavy oil price differential through refining and marketing or other means.

Some First Nations, environmental groups and municipal governments have raised concern about the Trans Mountain expansion, but opposition is not yet at the same level as Northern Gateway.

May be tied to Telephone Lake delay

Phil Skolnick, an analyst with Canaccord Genuity, said it is possible crude exports to China and subsequent proving of Cenovus crude are responsible for a delay in Cenovus choosing a joint-venture partner to speed development of its 90,000 bpd Telephone Lake project in Alberta.

Ferguson said a decision has been extended indefinitely from the original target of late 2011 because of late interest from “significant parties” in Asia.

“They could have pretty much anybody,” Skolnick said, noting that Cenovus has a lot to offer any partner from its knowledge of in-situ operations.

Cenovus is also a contributing to a Northern Gateway fund to help cover the costs of studies and the regulatory process, which is encountering increasing turbulence as municipal councils in northern British Columbia — including the City of Terrace and the Skeena Queen Charlotte Regional District — register their opposition to pipelines crossing their land and increased tanker traffic in their waters.

Enbridge issues

In addition, the Terrace Economic Development Authority has broken off talks with Enbridge to determine what economic benefits there might be for the city from the C$5.5 billion project.

British Columbia Energy Minister Rich Coleman said he would prefer local governments to follow his own government and wait until completion of federal regulatory hearings in 2013 before taking a stand.

“You’ve got to wait until you hear it all,” he said. “This is an important project for Canada and through this process there could be tweaks and changes that would actually allay people’s concerns.”

Enbridge still insists 20 First Nations of the 43 in British Columbia and Alberta that are located along the pipeline route have signed deals to share in a 10 percent equity stake in the project worth about C$400 million.

Enbridge Chief Executive Officer Pat Daniel said his company will not offer better financial terms to the aboriginal communities, but said he is prepared to look at an alternate route that would avoid sending tankers from the deepwater port in Kitimat along the Douglas Channel to open water.

Another look at Prince Rupert

He told analysts that although Kitimat is the best terminus based on extensive studies done for regulators, Enbridge will take another look at Prince Rupert, the deepest port in North America.

“We want to make sure we have thoroughly evaluated any and all routing opportunities,” Daniel said.

Prince Rupert was ruled out earlier because it would require a pipeline right of way in a narrow passage for about 50 miles along the Skeena River, one of British Columbia’s two main salmon spawning rivers.

FirstEnergy Capital analyst Steven Paget said he was not certain moving the terminal to Prince Rupert would remove any opposition.

Daniel rejected suggestions that the regulatory and construction phases for Northern Gateway could be extended to five years and be further delayed by court action, possibly scuttling the project.

“I can’t imagine that scenario based on the current fundamentals of significantly growing demand in China and significantly growing (crude) supply in Canada,” he said. “China very anxiously wants to diversify its supply of crude oil (away from the Middle East).”